To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Gettop Acoustic (SZSE:002655) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Gettop Acoustic, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = CN¥125m ÷ (CN¥1.5b - CN¥756m) (Based on the trailing twelve months to September 2024).

So, Gettop Acoustic has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Gettop Acoustic has performed in the past in other metrics, you can view this free graph of Gettop Acoustic's past earnings, revenue and cash flow.

How Are Returns Trending?

Investors would be pleased with what's happening at Gettop Acoustic. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 49%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Gettop Acoustic has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Gettop Acoustic's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Gettop Acoustic has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 7.6% to shareholders. So with that in mind, we think the stock deserves further research.

While Gettop Acoustic looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002655 helps visualize whether it is currently trading for a fair price.

While Gettop Acoustic may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.